Origins of American Health Insurance: A History of Industrial Sickness Funds

Published by EH.NET (February 2008)

John E. Murray, Origins of American Health Insurance: A History of Industrial Sickness Funds. New Haven: Yale University Press, 2007. xiv + 313 pp. $40 (hardcover), ISBN: 978-0-300-12091-2.

Reviewed for EH.NET by Melissa A. Thomasson, Department of Economics, Miami University.

The first serious attempt at promoting compulsory, government-sponsored health insurance coverage came during the Progressive Era. Progressives, led by the American Association for Labor Legislation (AALL) suggested that the existing system was inadequate and subjected workers unnecessarily to risks to their financial and physical health. Much like today, insurance reformers in the Progressive Era argued that one spell of bad health could lead to the financial ruin of most American workers. Unlike today, their chief concerns were less related to the high cost of medical care, but rather to the fact that sick workers who were absent from work did not earn income and did not have enough savings to protect themselves against such an event. Reformers tended to brush aside existing insurance plans (offered by establishment funds, fraternal organizations, unions, and commercial insurance companies) as inadequate, incompetent and subject to adverse selection and moral hazard. Until now, this view has not been challenged. The generally accepted story surrounding the failure of Progressive health insurance reforms in the 1910s centers on the defeat of the movement by well-organized interest groups: insurance companies, druggists, and physicians. This explanation, while undoubtedly part of the story, has always seemed incomplete. If the claims of Progressives about the need for a better system of insurance were true, why did the populace not rally around their cause?

In John Murray’s the Origins of American Health Insurance, we finally get an answer. In great detail and with a nice amount of evidence, Murray shows that workers did not push for reform because they saw no real need to replace the existing system. Murray demonstrates that the existing system of insurance was not underutilized, overly expensive, nor poorly run. One note of caution: the book is entitled Origins of American Health Insurance, but what we think of as “health” insurance bears little resemblance to the kind of insurance Progressives had in mind. Most insurance plans at the time provided little protection against actual medical expenses, but instead acted more like contemporary disability policies; primarily insuring workers against lost income due to illness (although some plans did offer small provisions for medical care). These plans were not true “health” insurance plans in the modern sense of the word, and were often referred to as “sickness” insurance plans. Murray’s contribution is really a history of these sickness insurance plans ? notably the establishment sickness funds offered by employers and those offered by unions.

Nevertheless, for readers interested in why the first proposals for compulsory health insurance failed, Murray’s book is a must-read. He takes on the allegations of Progressives and later historians who argue that these plans were inadequate and poorly run, and offers substantial evidence to the contrary. In careful detail, he shows that the AALL’s proposed plan would have actually been more expensive than the options available to most workers, and that contrary to the claims of Progressives, workers did seem to be able to save for times of sickness.

The book is divided into three parts. In the first part, Murray describes sickness funds and the political economy of sickness (health) insurance in detail, and compares the U.S. system (and Progressive proposals) with various European systems.

In the second part of the book, Murray first examines the rise and operation of sickness funds: why the funds were created, the growth and geographic variation of the plans, evidence about how many workers were covered and the scope of plan benefits. Data presented are clear and thought-provoking, and demonstrate that these plans did cover a sizeable proportion of the population, contrary to the claims of Progressive reformers. Chapter 7, in particular, is an important contribution. In this chapter, Murray examines the decision to save against unforeseen expenses versus to buy insurance. Endogeneity usually makes this a sticky problem to examine empirically; however, Murray uses an excellent instrument to resolve the endogeneity issue. He uses weeks of work missed for a reason other than sickness to instrument for weeks of work missed due to sickness. The variable should be correlated with savings (because a non-working employee is not earning income), but is not correlated with sickness. Murray specifies the model and looks at saving over the life cycle and shows that younger workers opted not to purchase insurance. When workers married and had families, they tended to purchase insurance, having not yet had time to accumulate sufficient savings. The oldest workers opted not to purchase insurance and relied on savings instead.

In part three of the book, Murray examines the reasons sickness funds declined over time. He first shows that the Depression was not responsible for the decline in funds over time, probably because employers may have decided which workers to lay off based upon their health. So what did lead to the decline in funds over time? According to Murray, it was advances in actuarial science that commercial firms adopted while sickness funds did not, thus giving the commercial firms an advantage. While this undoubtedly played a role, the chapter does not go quite far enough in discussing the intricacies between growth in medical technology (perhaps resulting in better health), the coupling of actual health insurance and employment and the resulting ability of firms to offer competitive health insurance, and the commercial offering of sickness plans. Murray can offer up these details and more in his next book. In the meantime, this book is very useful for anyone seeking to understand the nature of American health (and sickness) insurance before the 1930s, and the political economy of health insurance in general.

Melissa A. Thomasson’s recent publications include “Racial Differences in Health Insurance Coverage and Medical Expenditures: An Historical Perspective,” Social Science History (2006) and “Early Evidence of an Adverse Selection Death Spiral?” Explorations in Economic History (2004).